Financial management is a crucial part of any business organization. Whether you are running a large corporation or just starting as an entrepreneur, the ability to manage and analyze financial information is essential for making smart decisions about your business’s future.
Given the many economic and political forces at play in today’s global economy, it is more important than ever that individuals and businesses understand how these factors affect their bottom line. In addition to allowing you to predict trends, good financial management also allows you to react quickly and strategically to changes in your marketplace, giving you an edge over your competitors.
From forecasting models and data analyses to innovative new software options, there are endless tools at your disposal when it comes to improving your company’s financial management game—having these in your toolbox can be the difference between a business that thrives and one that just barely survives.
What is Financial Management?
But first, let’s define what financial management is and why it’s so important in business.
Financial management is a broad term that encompasses many different activities. At its heart, financial management is about making wise choices about how to use an organization’s limited resources. It involves several concurrent activities—such as planning, directing, and organizing—designed to achieve your organization’s financial objectives.
We like to divide financial management activities into two main categories:
- Strategic – Under strategic financial management, you make decisions aimed squarely at long-term success. That means that you may need to make short-term sacrifices to achieve your long-term goals. Examples of strategic financial management decisions are selling loss-leaders (like Costco’s near-mythical rotisserie chicken), deciding on the best marketing mix, or investing in new product development.
- Tactical – Tactical financial management decisions are those that you make on a day-to-day basis to keep your business running smoothly. These decisions are often more concerned with immediate results than long-term strategy. Tactical financial management activities rely mainly on staying ahead of the curve. Say your organization is dead-set on online marketing—but are you using the most effective mix of SEO, content marketing, and social media advertising? Reviewing your numbers regularly can help you adjust your tactics on the fly to make sure that you’re always using the most effective method possible.
Why Modern Businesses Require Financial Management
Financial management may have been a luxury for businesses in the past, but has become a necessity as the business landscape becomes more competitive. Modern businesses make important financial decisions daily basis, balancing short-term and long-term goals, evaluating risks and opportunities, and accessing economic stability. To be successful, a business must have skilled financial managers in charge of managing the company’s finances, setting up budgets to track spending, and planning for future expenses and investments.
Some specific ways that financial management impacts businesses include:
- Easier resource planning – Financial management involves tracking expenses, assessing risks, setting goals, and allocating funds to achieve those goals.
- Increased competitive advantage – By managing their finances more effectively, businesses can focus on improving various aspects of their operations to increase their competitive advantage in the market. This also helps improve brand image, which allows companies to attract and retain customers more easily.
- Improved economic stability – When businesses run more efficiently and have a better handle on their finances, employees can enjoy increased job security and benefits. This overall improved stability helps businesses weather tough times and rebound more quickly from setbacks.
- Making critical financial decisions – Financial management is essential for making complex financial decisions, such as whether to invest in new products or services, make acquisitions or expand into new markets.
Why Every Manager Should Learn About Financial Management
Organizations today rely on their managers and team leaders to make sound financial decisions that can affect the company’s bottom line. They are also responsible for allocating the funds that are made available to them, and for monitoring how these funds are utilized. It is therefore imperative for managers to have a strong understanding of financial management principles, to be successful in their roles.
Here are three reasons why financial management must be part of every manager’s training:
Staying on top of your capital
To keep your organization’s financial health in check, you need to be well-versed in financial management principles. This includes having a clear understanding of your organization’s capital and how it is being used. You also need to be able to identify any potential risks that could impact your capital, and put measures in place to mitigate these risks.
If a business earns profits, it is the job of financial managers to use or allocate those funds effectively. This may involve retaining part of the profits to reinvest in the business or to pay dividends to shareholders.
Efficient management of funds
This is the lifeblood of any organization, enabling it to meet its obligations, run its operations smoothly, and grow over time. Financial management encompasses all aspects of a company’s financial health, from accounting and budgeting to investment planning and cash flow management.
In this interconnected and fast-paced world, it can be all too easy for companies to overspend, run into debt, or even lose entire accounts. Yet with the right knowledge and tools at hand, businesses can keep their books in good order and avoid these costly mistakes. By using financial management tools like data analysis and budgeting programs, managers can stay on top of their company’s financial health and help ensure its long-term success.
In other words, good financial management is not just crucial today—it is essential to the future growth of any modern business. Remember: the more prudent you are in your spending habits today, the more secure your company will be tomorrow. Taking a more measured, thoughtful approach to money management now means investing in your business’s future prosperity.